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Friday, 13 April 2018

How to reduce your income tax in Singapore (make use of these tax reliefs and deductions!)

Back when I was still in my first job, my annual income tax was only about $200. This was based on a yearly income of $30,000, of which I saved $20,000 - read about how I did it here. (Nope, no bonuses either.)

I don't mind paying taxes as I understand and appreciate the fact that the money is channeled for the government to help the lower-income groups, as well as pay for other public goods such as our roads, education, etc.

But ever since I got headhunted to my second, and now third, job where I received a pay raise each time, my income taxes have jumped significantly and it has come to a point where I've been looking into (legal) ways to reduce paying so much. For context, my income tax jumped by over 10x, but my salary hasn't jumped 10x at all!

I've talked about how achieving financial freedom involves cutting down your expenses while looking for ways to increase your income at the same time. Income tax is definitely one area where you'd want to reduce, because Singapore's tiered income tax system is such that the more you earn, the higher percentage of taxes you'll have to pay.

For someone earning $30k a year, they only need to pay 2% of income tax, or $200.
If you earn $3,500 a month and get a 13-month bonus, you'll be looking at an annual tax of $935. If you're luckier and get more (eg. 3 months bonus), you can expect to pay $1,425.
But if you earn $80k annually (about $6k monthly with bonus), you'll be paying $3350.
If you earn $100k a year, you'll be paying over $5k...which could otherwise pay for a holiday to Europe!

While evading taxes is a crime, there are perfectly legal ways for you to reduce your income taxes. Here's some:

1. Top up your CPF account (and/or that of your parents).
I used to give my parents their monthly allowance in pure cash. However, ever since I found out about this hack, I've changed this to put the money as voluntary contributions to their CPF accounts instead. Given that my dad is already retired and my mum will soon be eligible to withdraw her funds, this approach makes a lot of sense to me as my parents still get their money, and I get to concurrently enjoy tax rebate for the same.

Since the maximum tax relief we can claim is $7000, you can also make voluntary top-ups to your CPF Special Account (SA) where it can earn attractive interest rates, and up your tax relief amount further to a maximum of $14,000.

2. Supplementary Retirement Scheme (SRS) relief.
If you've already maxed out your CPF tax reliefs, you can also make use of the SRS relief scheme to enjoy up to $15,300 of tax relief if you and/or your employer make contributions to your SRS account!

3. Donate to charity.
It (literally) pays to be kind!

I've always believed in contributing to charity to help those who are less well-off than us. After all, I come from a family whose parents couldn't even afford to send me to university, and I benefited from the university scholarship (generously funded by alumni) which allowed me to pursue my studies, so I'm extremely familiar with the struggles of not having enough money.

Because of my background, I have a soft spot towards donating to bursaries and other funds for needy students.

Aside from helping those who need it, the additional good news is, you can claim 250% in tax deductions based on the amount you donated!

4. Claim tax relief for supporting dependent or handicapped grandparents / parents / siblings / spouse.
If you have or parents, living with you who are older than 55 and earn no more than $4,000 annually, you can also claim up to $9,000 tax relief for supporting them (or up to $14,000 if they're handicapped, in which case the income requirement doesn't quite apply). But if you have siblings who are claiming for the same, you'll need to split that evenly with them. There are also tax reliefs if your grandparents stay with you.

Unfortunately this scheme doesn't apply to me since my mom is still working and my dad only just retired recently, so his annual income still exceeds $4000 for this year, but I'll be able to claim this soon next time!

If you're supporting a handicapped spouse or sibling, you can also claim up to $5,500 of tax relief.

5. For married spouses, claim NSman Self Relief.
Husbands can claim up to $5,000 if they're a key appointment holder (or up to $3,000 if they're not but served reservist), while their wives can claim $750 tax relief.

6. For parents, claim Parenthood Tax Rebate / Qualifying Child Relief / Working Mother's Child Relief / Foreign Maid Levy Relief
It seems like the government is really encouraging us to have kids, as they're giving out a lot of tax subsidies for those who do!

On your first child, you can claim $5,000 of Parenthood Tax Rebate. If you have 2 kids, add on another $10,000 for your second child. Or, if you're like my cousin with 3 children (or more), you can add on $20,000 more for each subsequent child! This works out to a significant total of $35,000 of tax rebates if you have 3 children and make the maximum claims for them!

Under the Qualifying Child Relief, you can also claim up to $4,000 per child if your offspring is younger than 16 years of age or studying full-time.
Tip: the spouse with the higher income should be the one claiming for this, as it could probably reduce his/her taxes by a larger margin!

For mothers who are working and handling dual roles (mad respect to you women), you can claim 15% of your earned income in tax reliefs for your first child, 20% for your second, and 25% for each child if you have 3 kids or more! Do note that the total cap for QCR and WMCR is $50,000 per child, but that's already a lot of tax deductions (and making me think twice about whether we should aim to have 2, or 3 kids!)

If you're hiring a domestic helper at home, you can also claim twice the amount of foreign maid levy paid for a maximum of one foreign maid last year against your earned income.

7. For landlords, claim tax deductions on rental expenses.

Saving up to 15% of your gross rent or actual rental expenses incurred can be quite significantly, while protecting your (somewhat) passive rental income earned!

Worked Example

Thus, by using the (applicable) methods above, a working mom (under 55 years old) who earns $6k a month with a 13-month bonus, yet has 2 children and lives with her retired parent who's helping to care for her kids, can get away with paying NO income tax, instead of the original $3,210!

*Assumes the following parameters:

That's a whopping $3,210 saved in taxes (which you can then use to fund a holiday abroad, or other expenses) as long as you make full use of the reliefs available!

(I haven't even factored in Parenthood Tax Rebate - which should be $25k in this worked example - and already this mom doesn't need to pay a single cent of taxes lol!)

And that, my dear, is how you can legally get away with paying ZERO taxes in Singapore.

As your income rises (the moment you get any pay raise, commissions or bonuses), you'll soon realise that your income taxes rise disproportionately and you could be paying a huge chunk if you aren't savvy about the various relief schemes available for you to tap on. Considering how much you'll have to pay otherwise, this is where saving on your taxes become increasingly important!

Looking at the schemes available, wouldn't it make sense for the husbands to be stay-at-home dads while the mothers go out to work? :P (since there isn't a working fathers child relief scheme). If you want to reduce your income taxes, having kids will definitely help!

At any rate, just don't try to avoid paying taxes as the Singapore government now considers that as a predicate to anti-money laundering! That involves personal and even criminal liability, so just be a good citizen and pay your income taxes. But be a smart citizen so you can get away with paying less, or even none at all ;)

Public Service Announcement (PSA): Remember to file your income taxes by April 18, 2018 :) and don't forget to make use of these tax reliefs and deductions that I've just shared!

With love,
Dawn

Note: This post was written in conjunction with IRAS, and all infographics shared here are rightfully credited to them!

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You can call me Dawn, and this little space on the Internet is where I write about becoming financially-free. Join me as we learn more about savings, budgeting, paying off debts, insurance and investing together!

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Please note that all statements published on this blog are solely opinions of my own i.e. of a personal nature, and should not in any way be taken as statements of fact. Readers are encouraged to do their own research before arriving at any conclusions based solely on materials provided, or republished, on this blog.